Too early to bet on stocks' Santa Claus effect?

There are only 137 shopping days remaining until Christmas, so should investors start stocking up on tech shares?

3 min read
There are only 137 shopping days remaining until Christmas, so should investors start stocking up on tech shares?

August of last year marked the start of a flood of analyst reports with optimistic estimates for online sales, traffic and advertising. The result: Shares in companies from Sony to Amazon.com to Yahoo posted triple-digit gains between August and December.

Unfortunately, many analysts say history is not likely to repeat itself.

"Last year was a special case," said Barry Parr, director of consumer e-commerce research with International Data Corp. "I'm not prepared to say that this will happen again."

Wall Street professionals describe last year as an anomaly, created by low interest rates and intoxication with technology and Internet companies.

As tech stocks were mired in a summer slump last year, similar to this year's doldrums, analysts began to issue rosy forecasts about the upcoming holiday season.

In August, analyst Derek Brown, formally of Volpe Brown Whelan, said investors were looking to ride on holiday sales. "The investors I've spoken with absolutely are looking to own some key Internet franchises ahead of the last part of this year."

Also that month, Argus Research analyst Alan Mak predicted that Amazon shares could reach his 12-month target of $190 by the end of the year because of anticipation about holiday sales. At the time, the shares were in the $40 range, and they surpassed $100 by December.

In addition, numerous research firms issued optimistic estimates about rising online sales and advertising.

The exuberance spilled over to numerous stocks. During the period leading up to the new year, Apple Computer gained 113 percent, Yahoo was up 239 percent, Sony surged 136 percent, and eBay shares doubled. By comparison, the Nasdaq gained about 50 percent between Aug. 10 and Dec. 31.

"Talk about irrational exuberance--everyone was gung-ho," said Richard Peterson, an analyst with Thomson Financial Securities Data. "The economy was doing well, (interest) rates were low, (retirement accounts) were flush."

This year, however, is likely to produce a much more muted response.

"The valuations on (e-commerce) companies have come down dramatically, and market participants are finally focusing on earnings," said James Oberweis, a portfolio manager with the Oberweis funds. "Although sales may be very good during the holiday season, they will have to deliver profits."

Poised for takeoff?
Many tech stocks climbed in August 1999 as investors grew optimistic about a holiday bump in sales, advertising and traffic.
Company Price on 8/10/99 Peak from 8/10/99 to 12/31/99 % gain
Amazon $45.50 $106.69 (12/10) 134
America Online $42.50 $91.75 (12/10) 116
eBay $44.63 $89.75 (11/24) 101
Yahoo $63.75 $216.34 (12/31) 239
eToys $30.50 $84.25 (10/11) 176
Peapod $6.75 $15.00 (11/4) 122
Apple $27.69 $58.91 (12/7) 113
Sony $61.35 $144.83 (12/30) 136
Source: CNET Investor
The Federal Reserve has ratcheted up interest rates six times since June 1999, and investors are anxiously awaiting the outcome of its next meeting later this month.

The Nasdaq also has failed to recover from a 10 percent one-day plunge last April.

Perhaps most damaging of all: Internet companies are now being evaluated on actual results rather than optimistic expectations.

"These companies have had a chance to post two or three or four quarters of results, and they have not set the world on fire," Peterson said.

Just because a company see story: An Amazon bull pulls backracks up sales during the holidays, it does not mean Wall Street will embrace the stock, analysts point out. E-commerce sales, for example, are expected to grow by 50 percent this year, but profits still could prove elusive, said IDC's Parr.

"I would anticipate that this year, the best known sites will do very well; the question is, will they do better than Wall Street expects them to?" Parr said.

Added Oberweis: "What tends to move stocks is unanticipated changes."

Despite the pessimism, at least one analyst is already beginning to talk about a holiday boost in some tech stocks.

Last week, Merrill Lynch analyst Henry Blodget downgraded Amazon shares to a short-term "accumulate" from a "buy." At the same time, he said he expects the company's stock to benefit from holiday sales.

With Amazon shares trading near a 52-week low, investors sure hope so.